do when electronic exchange comes
April 24, 2000
BY MICHAEL KRAUSS
do you do when an electronic exchange appears in your industry?"
your business model," was George Derby's reply.
strategy officer of Net: Ratio, a Hewlett-Packard-backed, San
Jose, Calif.-based start-up, establishes electronic exchanges
for niche markets. We were talking in March over lunch at Esther
Dyson's PC Forum.
you're a small printing company," Derby went on. "Over
the years, you've marketed your services through a small sales
force to a handful of loyal customers. Suddenly, I come along
and establish an electronic exchange where midsize buyers and
suppliers can trade online."
got to totally rethink your business," he said.
yet vague. I knew intuitively that Derby was right, but what would
I do if the electronic exchange phenomenon hit my hypothetical
printing business, as it clearly is hitting most businesses today?
I would hope
to avoid denial, seek to understand the phenomenon, set a game
plan, and act quickly. So should you.
a marketing or sales VP of a midsize company in an industry facing
a new electronic exchange, accept the fact now that electronic
exchanges will be a way of life. Learn about them and welcome
them even if the change is uncomfortable; remember, in the new
economy, the winners are those who move first.
trading comes in various forms, but there are essentially three
auctions: These are seller-controlled, electronic markets in
which the seller entertains bids from many buyers.
auctions: These are buyer-controlled, in which a buyer gets
offers electronically from many sellers.
exchanges: These are electronic markets in which many buyers
and sellers interact to define prices and trade goods and services.
The simple reason, though not the only reason, these exchanges
are appearing is that they help drive down costs, particularly
search and sales cost. Creating totally new products and services
and new wealth is another reason. To understand the wealth-creating
power of an Internet exchange, consider the value of three different
kinds of networks: a broadcast model, a telephone model and the
In the '60s
and '70s, CBS, NBC and ABC were potent market forces holding power
and creating wealth because they controlled the ability to communicate
from one fixed point to 80 million television households. Not
a bad way to make a buck based on a "one-to-many" broadcast
just across the Hudson River in New Jersey, AT&T executives
know that the value of their network is a function of the number
of users or members on it. The key value driver to these "any-to-any"
networks is scale and the fact that anyone on the network can
communicate with anyone else in an individual conversation. Telephone
and cable TV companies are valued by Wall Street based upon a
the left coast, consider Pierre Omidyar and his goal of creating
an online exchange to trade Pez dispensers for his girlfriend.
This foray became eBay.
eBay is a
"many-to-many" trading network earning "rents"
or fees on each transaction, and any eBay member effectively can
trade with all other eBay members. These many-to-many trading
networks offer the most potential connections or permutations,
and they're the reason suppliers and providers are scrambling
to own online b-to-b exchanges in vertical industries. If you
own the exchange, you get a piece of each transaction-and that's
a pretty lucrative deal.
more: By building the electronic exchange, you may set the stage
for creating derivative products and services even more valuable
than the core product. Consider that when broadcast television
was commercialized in the '50s and '60s, the network owners became
wealthy, but it made the publisher of a small print publication
known as TV Guide far wealthier.
And the marketing
executive of that hypothetical midsize printing company might
consider setting up his own electronic exchange or team with others
to set one up. That's what Michael Levin, a 26-year veteran of
the steel business did last year when he became CEO of the online
exchange e-Steel. Even if the big players already have moved into
your market, you can set up partnerships and relationships and
learn how to transact business most effectively online. For example,
VerticalNet Inc., an operator of several dozen online exchanges
in vertical industries, and other firms like it allow companies
to set up "electronic storefronts" to transact business.
such exchanges don't eliminate personal relationships, as buyers
and sellers often establish track records and develop ratings
(as avid eBay traders know). In fact, one of the hottest new start-ups
debuting at PC Forum this year was a company called Open Ratings,
led by MIT Media Lab Professor Pattie Maes, which may become the
Web version of TV Guide. Open Ratings will provide the technology
infrastructure to trading exchanges and other Web sites for buyers
and sellers to share information about each other. Therefore,
one key strategy of your online buying and selling efforts should
be to establish a solid rating or track record as a seller or
hardest part of adjusting to the new online exchange phenomenon
will be the cultural and organizational adjustment. The midsize
printing company may need more computer terminals and executives
who understand Internet protocol and fewer affable sales reps.
The corporate culture issues can be the greatest inhibitor to
success, which is why setting a game plan is so important.
us full circle to what Derby was saying about creating a new business
Once you have
recognized that the future is here, once you have gathered knowledge
and understanding about electronic exchanges, and once you've
set a game plan for the future, you may find that you've significantly
changed your original business model and the whole way you provide
value. All of that is OK, so long as you do it quickly before
the midsize printing company next door figures out the game and
puts you out of business.
I guess Derby's
point wasn't so vague after all.
is a partner with Diamond Technology Partners in Chicago.
He can be reached at email@example.com.
corporate culture issues can be the greatest inhibitor to success,
which is why a game plan is so important.